Failure rates among emerging small businesses average between 70% and 80% within the first five years, with about half of those failures occurring within the first year. High tech businesses experience even higher rates of failure within the first three years of startup. Of all the reasons for these excessively high failure rates, the lack of access to adequate funds for initial capitalization, follow-on growth and business expansion is a primary factor. Historically, the lack of sufficient operating capital for cash needs has limited emerging companies expansion potential. A business failure in the world of high technology incrementally limits economic growth and means that valuable technologies and services may not ever reach the market. Drugs to treat diseases, telecommunications technologies to move greater amounts of data utilizing less bandwidth and new internet solutions can be stagnated or permanently paralyzed due to the inability to develop the business at the right time. Estimates suggest that small business failures account for billions of dollars of losses in potential sales, jobs and tax revenues annually.
Conventional emerging company financing involves raising funds through various sources including friends and family, angel investors, venture capital and other equity investors. Integral to these approaches is the dilution of ownership of emerging companies by the very persons upon whom success or failure of the venture lies. Faced with the potential loss of control, as well as the economic reality that growth requires capital, many owners of emerging companies would prefer debt financing. However, accessing debt capital from conventional banks, as an emerging company, has several intrinsic problems including lack of negotiable collateral, limited business performance history of the debtor, offering of a product which is non-traditional, hence untested, and which may be directed to an undeveloped or as yet nonexistent market.
As a result, commercial banks have viewed the emerging company market, especially the high technology arena, as very risky and have avoided significant participation. Due to an increased interest in small business development on the national and regional level, this business segment has become one to which banks would like to provide services. Unfortunately, they are not well suited to develop debt-financing products for this market due to their inability to establish an asset value for intellectual property and to establish predictive models to provide adequate risk management analysis as well as the absence of both a basis for reviewing operational/management structures and a liquidation strategy in the event of a loan default.
Although computer-aided and standalone systems are known to have been used for general risk evaluation, risk allocation and risk transfer purposes, for example in the insurance, real estate and financing industries, they have not typically been employed to enable intellectual property to be used as loan collateral, to establish maximum values and amortization schedules for such assets or to examine their transferability or viability. Therefore, in order to provide broader access by emerging technology companies to traditional lending sources such as banks, there exists a need to value intellectual property both as to its financial worth and credit risk and to make such loans as attractive as possible to lenders.